Losing Apple’s ear

Goertek’s biggest client

Apple first released its AirPods Pro in 2019. At the time, the new wireless earbuds were considered an upgrade because they offered noise-cancelling technology. AirPods Pro 2 , which the tech giant unveiled in September, promise even more enhanced noise cancellation. The device comes with a new skin-detect sensor that can tell the difference between your ear and other surfaces, so the earbuds will not automatically begin playing when placed on tables or in pockets.

The company expects the new AirPods Pro to be a big hit during the festive season. But last week, one of its suppliers said that it had been told to suspend production.

The Shenzhen-listed audio components maker Goertek warned that “a major overseas client” had asked it to curtail making a “smart acoustic product”, a move that could reduce the company’s revenue by Rmb3.3 billion ($455 million) in the fourth quarter.

Before long, speculation spiralled that the client in question was Apple.

Kuo Ming-Chi, an analyst at TF International Securities, confirmed that the suspension was “more likely due to production issues than demand issues,” implying that the problem has to do with Goertek and not Apple.

Other analysts chimed in, saying that the reason for the halt was because Goertek had “wiped off the glue on some removed components and structural parts and reused them”.

The Weifang-based company started supplying acoustic components and wired headphones to Apple in 2010. By 2018, it had won 30% of the OEM orders for Apple AirPods, becoming the second-largest contract manufacturer of the earphones.

Goertek started producing the AirPods Pro series two years ago. In the last few years, Apple has become Goertek’s biggest client, contributing as much as half of its revenue at one point, says TMT Post.

To pacify worried investors, Goertek said the suspension only applies to the one product and its cooperation with the ‘unnamed’ client remains intact for others. Nevertheless, the day after the announcement, the company saw its market value slump Rmb8 billion in a single trading session.

Goertek has a lot riding on Apple’s newest AirPods. In the first three quarters of this year, Goertek’s revenue came in at about Rmb74.2 billion, a year-on-year increase of 40.5%, which was the lowest growth rate since the third quarter of 2019. Specifically, revenue from intelligent acoustic products increased only 3.6% to about Rmb19.9 billion during the period.

Meanwhile, Apple has reportedly tapped another manufacturer Luxshare ICT to fill the gap. Kuo suggested in his widely-circulated report that the Dongguan-based contract manufacturer has won all orders for AirPods Pro 2, becoming its exclusive assembler.

Luxshare’s neighbours in Dongguan may be facing more of a struggle, however. The Financial Times published a lengthy article last week looking at how many factory owners in Guangdong province have closed down. Manufacturers for the electronics and renewable energy sectors were the hardest hit.

Among the reasons, the FT reports: disruption to the supply chain from the frequent lockdowns around the country and declines in orders from Europe and the US, where economies are slowing and inventory levels have restocked.

Others also cited tensions between the US and China, which have accelerated a shift of manufacturing out of China to Southeast Asian countries such as Vietnam as companies look to diversify their sources of production.

Last December, the chairman of Alco Holdings, an electronics manufacturer in Dongguan, jumped to his death in Hong Kong. According to Hong Kong newspapers, the 61 year-old was suffering from depression due to business issues. Confirming Alco’s dire prospects, the Hong Kong-listed firm announced in late August that it was closing down one of its factories in Dongguan. In a notice, Alco said it had invested heavily to upgrade its technology in recent years. However, the outbreak of the pandemic has damaged export-oriented businesses. “Serious losses have occurred, and it became too difficult and unsustainable to keep going,” the company wrote.

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